The Growth Premium in SaaS Has Never Been Higher

Let’s take a look at 3 recent transactions and valuations in SaaS around $1.5 billion – $2 billion:

Whoa.  What’s going on?

It’s pretty simple.  The “growth premium” in SaaS has never been higher.  Slow growth like Workfront, even at $200m ARR, is “only” worth 7x ARR.  A strategic acquisition like Llamasoft is worth 15x.  And as we’ll see below, those prices might actually be pretty high, because acquisitions often come at a premium.  Both might be worth less on the public markets.

And Hopin, a digital events company that hit $20m in its first year?  It’s worth 100x ARR.

This is a pretty big leap from the old days, when basically every hot company was worth 10x ARR in the private markets, and everything else was sort of worth nothing.

But fast forward to today, and there have been dozens of SaaS and Cloud IPOs, and the top ones trade at very high “revenue multiples”.

The average multiple of revenue in the BVP Nasdaq Index of public SaaS and Cloud companies is 15x next year’s revenue:

But averages are misleading.  Let’s look at the slower growth SaaS companies in the index, like Box, Zuora, Dropbox, and Domo.  Great companies, all of them.  Iconic SaaS companies.  But they are still trading at just 3x-5x next year’s revenue.  That’s … low.  Real low.  And much lower than you think you are probably worth:

In fact, the slowest growing 20 public SaaS companies in the index only trade for 4.9x next year’s revenues on average.  While outliers like Zoom and Datago trade for almost 40x.  That’s almost a 10x premium for hyper growth in the public markets.

So we’re a long way from the days where every hot SaaS company was somehow worth 10x this year’s revenue.  Instead, the top ones are worth 40x next year’s revenue, or more.  But the slower growth leaders, even at $100m-$500m+ in ARR, are perhaps only worth 3x-4x next year’s revenue.  And the weak?  They may be worth nothing at all.

If you can grow faster, it’s more worth it than ever in SaaS and Cloud.  And if you hit a slow patch, assume for now, you probably are unfundable in most cases.  Yes, there’s a huge premium for hyper-growth today.  But there’s also no interest in VCs for the types of multiples even Dropbox has.

Published on November 10, 2020

Pin It on Pinterest

Share This